The fiscal policy for the ensuing year has turned out to be a please-all- exercise barring a microscopic minority and is clearly intended to be populist than pragmatic.
The fiscal policy for the ensuing year has turned out to be a please-all- exercise barring a microscopic minority and is clearly intended to be populist than pragmatic.
However, confounding expectations, the finance minister has also performed a feat that most pundits have deemed to be impossible – the containment of the fiscal deficit to almost the targeted 5.1% of the gross domestic product in the current year. This in the face of an economic slowdown, leading to faltering tax revenues and a let-up in other areas of revenue as well.
True, there was a trimming of expenditure as well and the revised figure of the fiscal deficit bears P Chidambaram out. But, the truth is somewhat different.
The crucial revenue deficit has widened to Rs 391,245 crore from the budgeted Rs 350,424 crore or from 3.4% of the GDP to 3.9%.
Even the so-called effective revenue deficit has gone as per the revised estimates from what was projected and the ratio to GDP is slated to jump to 2.7% from 1.8%.
Further, the reason behind a much smaller absolute spurt in the fiscal deficit appears to be not an across-the-board cut in spending but mainly in regard to plan head and more particulary, capital expenditure.
On the other hand, the axe has been used in regard to defence – revenue and capital –the outgo on account of subsidy has burgeoned and that relating to petroleum has more than doubled from the original allotment.
In a larger sense, even if it is conceded that the centre has achieved a modest degree of success on the budgetary front in this year, obviously the austerity measures cannot be persisted with long without hurting growth as well.
This is because government is a major demand driver in the economy and prolonged belt-tightening on its part may be detrimental. In other words, the seemingly good show on the fiscal front should not and cannot be repeated without adverse effects.
Moreover, both the absolute size of the revenue and fiscal deficits are a cause for worry and when the borrowings are use to fund current consumption, it goads the government to borrow more, setting in a chain a vicious cycle.
This is what is now happening. As much as a quarter of the revenue expenditure is used to meet the interest payment obligations while this proportion is close to 60% of the total borrowings. In other words, bulk of the gross fiscal deficit is absorbed by the interest burden alone.
The finance minister may claim success relying on the ratios to GDP of the gross fiscal deficit but, the absolute size of this parameter is staggering. And, when it is deployed largely to non-productrive purposes, the risk to the fisc and the economy is manifold. It is time to go back to the virtuous tradition of public finance where balanced current account and borrowings strictly for investment needs to be revisited.
If the budget is viewed by the officialdom as a game changer, nothing could be farther than truth.\S
S Gangadharan is an economist
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